The Davids of E-Commerce

April 22, 2001

By the time the dot-com investing backlash started to peak last fall, my cynicism toward e-commerce stocks had reached the stratosphere. One afternoon I typed such generic words into my browser as buy, toys, furniture, and pets, and found that by simply adding ".com" suffix I had reached a financially struggling e-tailer that had sold stock before figuring out how to make a profit.

But nobody paid much attention to the thousands of tiny Web sites that started modestly, without the help of venture capital, and now are doing fine. These no-frills Web businesses are focused on selling stuff that people will come searching for without being goaded by expensive marketing and promotion.

Do a search for something you need, and you're likely to find at least a couple of sites that sell it. They're small businesses selling fancy bathroom products, educational services, auto parts, even lingerie. And they're not looking to corner a market or spend millions building a brand. They're mom-and-pop operations thinking small.

MIGHTY MINIS. And they're a big reason why e-commerce continues to thrive despite the Internet meltdown. Says Catherine Skelly, Internet analyst for Gruntal & Co.: "I don't even think of these sites as dot-coms. They're small businesses that just use the Web as another form of communication with their customers."

BusinessWeek's Arlene Weintraub has dubbed these companies "mighty mini-dots." The Wall Street Journal's Kara Swisher has called them "ants" weathering the economic winter. They're niche players with a handful of employees selling such goods as software or garden tools, and they're everywhere.

Take Justballs.com, which sells any kind of sports ball you want. It expects to be profitable on revenues of $35 million in 2001. Or Quickbrowse.com, which combines your favorite sites into a single Web page for easy viewing. Or Underneath.com, an underwear Web retailer that claims to be in the black selling sports bras, briefs, and panties for any size person.

MONEY FROM A FIRE HOSE. So much for the idea that success on the Net depends on getting huge at any cost. These little gems of the Web are a thousand points of light for e-commerce. "We're seeing traffic filtering more and more to these smaller sites -- thousands of specialized boutiques," says Tim Miller, president of Webmergers.com, a hub for buyers and sellers of Internet companies. Miller views last year's demise of dot-com stocks as the sad result of venture capitalists wanting IPOs too fast from too many companies that lacked focus. "VCs were only dispensing money through fire hoses," says Miller. "There were no modest alternatives."

Mini-dots are proving that profits can be made without much investment. "Because we didn't get venture capital, we didn't get the opportunity to waste a ton of money," says Jeffrey Johnson, owner of Underneath.com, which is now looking for investors. Johnson works with about 15 employees in a small warehouse in downtown Atlanta. At Underneath.com, inventory control doesn't involve a costly back-end software system. It entails him eyeing a half-empty pallet of Champion sports bras resting in the rafters outside his office.

He doesn't have an army of customer-service reps answering e-mails and fielding calls, either. Johnson is his own customer-service department. The company also does very little marketing or advertising anymore. Johnson felt it never made an impact.

INFANCY. Underneath.com stands out in another respect: It earned $30,000 last year on sales of more than $620,000 -- its first profit in three years in business. "We've always had the attitude that the Internet remains in the infant stage," Johnson says. "I ask friends and family all the time if they shop online. Most say they don't. To be honest, I don't shop online very much. [Selling underwear online] isn't glamorous. But it's just one of those products that makes sense for the Internet."

Even mini-dots have to start with something, though. And today's financing for Web startups comes in large part from so-called angel investors -- individuals or parent companies that invest $1 million or maybe $5 million rather than $50 million, Miller says. The result has been a proliferation of mini-dots that remain in private hands. And many of them grow very fast.

Here's an example. Before a ski trip to Vermont last month, I ordered "high-performance" long underwear designed for skiers and runners at Craft-USA.com, a niche online catalog outfit owned by the Swedish company Craft Skandanavia. It makes clothing for cold-weather outdoor sports, and before the Web site was started, the Craft line was sold exclusively in specialty ski and cycling magazines. The Craft Web site is clunky and its offerings are thin, but the customer service is fine and the clothing is top-notch.

WHO NEEDS ADS? I had a technical question and e-mailed it to the company. The owner responded in a few hours. Two days later, the merchandise arrived. Piece of cake. "For me, it's just another avenue to sell products," says Huub Valkenburg, Craft's owner. He says he spent a measly $20,000 last year building and maintaining the Web site -- a tiny outlay compared to the dozens of failed "e-tailers" that spent $20 million on marketing alone.

"The funny thing is, I'm spending less on advertising this year. and my Web sales are going up," says Johnson. Last year, the site accounted for 8% of the company's sales while this year it's 15% so far, he says.

Certainly, many mini-dots are experiencing growing pains. And many go out of business before you even hear about them. But just as with a non-Web company still learning the ropes, managers of mini-dots are forced to make tough decisions on spending and grow slowly from there. It lowers the risk of failure. In some cases, mini-dots are held together by a patchwork of outdated technologies, such as a lousy search engine or customer-transaction software that's full of glitches.

LESS RISK. Nonetheless, traffic and transactions grow steadily. The customers keep coming even though investors don't. "There will always be a place for the little guys. The same thing is happening online that has happened outside the Web for hundreds of years," says Martin McClanan, CEO of RedEnvelope.com, an upscale gift Web site that also sells through print catalogs. "[The mini-dots] have a lower risk profile than the many dot-coms that took part in the great bubble of venture-capital funding that let so many companies accelerate so quickly."

The trend is starting to show up in Web traffic numbers. A recent study from Alexa Research suggests that Internet traffic is gradually diffusing from the biggest sites toward the smaller ones. That's contrary to the conventional wisdom that activity is concentrating at the biggest e-tailers. But Alexa says the largest sites saw their share of Web traffic shrink 12% from June, 2000, to January, 2001. While the top 100 sites accounted for 34% of total traffic last June, that figure fell to 30% in January, Alexa says.

The inevitable conclusion seems to be that rinky-dink retailers and service providers are destined to play an important role in e-commerce growth. "You can either be really big...or tiny," says McClanan, whose privately owned, VC-financed company is aiming to be very big. The smaller sites may not have the same name recognition, but search the Web for that George Foreman Grill you've always wanted, and you're liable to stumble on several sites that sell them.

Think of them as the polar opposites of bigger-is-better Internet players like Amazon.com. Instead of making big waves, these sites are actually making money. By David Shook in New York